I am an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, I serve on the Board of Directors for the Bitcoin Foundation.

PayPal Assault On File-Sharing Sites Makes Business Case For Bitcoin

BitTorrent and Bitcoin were made for each other. An article on TorrentFreak reports that PayPal is requiring private BitTorrent tracking sites to provide them free access for purposes of monitoring user content for possible copyright infringement.

On the very same day, another TorrentFreakarticle claimed that researchers at Boston’s Northeastern University show domain seizure of file-sharing sites to be ineffective and that blocking the money streams to these sites would be a more ‘fruitful’ solution. And, it is already happening in a major way. The money stream targeting even extends to ISPs that happen to be BitTorrent friendly.

Just as with the payment-oriented attacks against the online pharmacy industry, censorship-resistant bitcoin appears to solve the problem by providing a decidedly nonpolitical currency. Used properly, bitcoin can have the privacy attributes of paper cash and bitcoin doesn’t make morality judgements about what you choose to do with your money. It is purely a value transfer protocol and it functions generally in accordance with the same distributed peer-to-peer principles as BitTorrent.

Of course, many commenters to the articles have already made the connection to a bitcoin solution but with varying degrees of endorsement. Private BitTorrent trackers traditionally rely on donations for the operation of their service and PayPal is so widely used that donations would drop if forced to rely on lesser-known payment methods.

Indeed PayPal is a private corporation and using their payment service is voluntary. But the problem is that, through fear of liability or outright pressure from authorities, PayPal enforces a blanket global policy across legal jurisdictions as a substitute for due process. File-sharing sites comprise both file-hosting and BitTorrent tracking sites each of which may have different legal status in different jurisdictions depending on interpretation and enforcement of various copyright laws.

PayPal is actually setting the stage for its payment successor. “Bitcoin as a viable currency keeps growing in appeal with every incident like this. These companies are undermining their own viability,” said a veteran redditor.

According to TorrentFreak, PayPal has started freezing the accounts of private BitTorrent trackers until they provide PayPal unfettered access to the site in question. File-hosting services MediaFire, DepositFiles, and Putlocker have had their PayPal accounts disabled too. Additionally, file-hoster PutLocker had their PayPal funds frozen for six months because they objected to the backend monitoring of their customer’s files.

This action wouldn’t seem so difficult if PayPal were barely used, but for those unable to prepare for alternatives it can have a significant impact on revenue. “This has a paralyzing effect on the file-hosting industry where 90% of the users of some sites pay using PayPal,” declared an owner of a major file-hosting service.

Established private tracker TorrentBytes announced that they may have to shut down unless they can find a way to process payments:

Problem is not lack of donations, but entirely on handling them. As of current every service provider the site has to pay for only accepts PayPal, Credit/Debit cards or direct bank wiring. Only one provider allows bitcoin. Unless we can figure out some realistic and possible way to do site finances completely PayPal free, it seems like the story of TorrentBytes will end very soon after January 2013.

Bitcoin can be accepted fine without any third-party involvement. Spending them remains the bigger hurdle. While services like BitPay and Coinbase exist that will accept bitcoin payments on your behalf and convert out to national currencies, operators like TorrentBytes may not have a bank account or a credit card to use for their own procurement. If businesses don’t want to exchange bitcoin for cash physically or load bitcoin onto a surrogate offshore debit card for purchases, bank accounts are still required with most online bitcoin exchanges. Life can be tough in the early days of a stateless currency.

If PayPal free is the goal, several VPS providers already accept bitcoin for payment of hosting services. In turn, file-hosting sites and private torrent sites that have successfully adopted the bitcoin payment method from their users include Lumfile, filecloud.io, and TorrentLeech.

Maybe the researchers have a point about targeting the money stream. It has been speculated that blocking the money stream to governments would solve the regulation of the economy and unbridled spending problems too.

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Seems to me that PayPal has overstepped itself and put itself in the hot seat of legal responsibility that it should have fought harder to insulate itself from to start with.

By taking on the watchdog position of policing everyone who uses their service they opened themselves to being held legally and fiscally liable.

I see that as holding the Mint responsible for illegal drug, gun or gambling because those criminals use the money they print. Banks and financial companies have a reasonable due diligence to only process money for legal purposes and the systems in place to detect those activities are not perfect but took a long time of observation and thought to determine and implement in the industry. The reason they did is no one wants to be responsible for someone else’s liability but in the PayPal arena they either foolish have accepted or were erroneously were forced to take on the role of internet cops and are invading and risking other businesses in their militant approach to terms of service and snooping.

I think it’s high time and we will see a shift in online payment and money flow processing as others carefully watch and build business models that avoid the mistakes of the ones that were first into the space. Such is the risky evolving world of risk and regulation with new technology and services. Someone has to be first and take the stumbles and pain of miss stepping through a business model no one else has, however this is one that could have been avoided with a little more brainstorming perhaps.

“Banks and financial companies have a reasonable due diligence to only process money for legal purposes and the systems in place to detect those activities are not perfect but took a long time of observation and thought to determine and implement in the industry. ”

HSBC was literally founded on trading opium, and is still very much in the drug game (as, no doubt, other banks are too). They very recently got fined nearly $2billion for laundering drug money (of course, no one was prosecuted): http://www.guardian.co.uk/business/2012/dec/11/hsbc-bank-us-money-laundering

Jon PayPal and others are setting the stage for their own downfall. IMHO Right now they have a worldwide monopoly in a sense, but as Bitcoin are accepted more it will give the people the power to use whatever choice of currency they want. Bitcoins like Paypal are just a transactional system in a way. You have money in your Paypal account, and you have money in your Bitcoin-qt wallet -whats really the difference. Bitcoin-Central new status as a kind of a bank will legitimize it and when the profits come in some will get there heads out of the sand. We also saw the ECB -bank that controls the EURO already thinking about Bitcoin FRB- Fractional Reserve Banking – the cornerstone of creating money out of thin air. These changes will lead other legal entity to re-think Bitcoins. I just completed a new book -Digital Virtual Currency and Bitcoin on Amazon http://www.amazon.com/dp/B00AYA4SVS -my 2 cents is that the global bankers see the velocity of transaction reduce by Bitcoin and this effects their transactional fee’s they charge and bottom line their Bonus money – Maybe we could pay the bankers bonus with Bitcoins then they may accept it more.

“PayPal’s customer base”? That consists of two types: those that are already using a Visa or MasterCard and those that are unable to get a credit card from a real bank … PreyPal cannot survive without riding on the backs of Visa and MasterCard, not the other way round; PreyPal is a parasitic, clunky, middleman that does about one percent of total payments business and has little long term future outside of the atrophying eBay marketplace now that Visa and MasterCard have developed their own digital wallets …